Invictus here.

A few items of interest (I hope) that I’ve been thinking of lately.

What Type of Jobs Recovery Are We Having?

Everyone’s seen Bill McBride’s employment chart, which he dutifully updates every month (along with just about every other economic release that comes out). Bill’s chart shows the percent change in employment relative to the peak month. And there is simply no denying its ugliness.

However, the picture is a wee bit different when we look at the actual recovery, which is to say if measure job growth from the trough and not the prior peak:

Source: St. Louis Fed, Series USPRIV

What we clearly see is that, from a trough-to-date perspective, we’re tracking almost spot-on with the 1991 recovery and, yes, ahead of the Bush Boom recovery. Of course, lest I get skewered, this is not at all to say that I find this recovery in any way satisfactory. It is not. However, as I’ve said many times, if anything was really different this time it was the depths to which we plumbed, not necessarily the pace of the recovery. This chart supports that thesis.

Dividends vs Interest

As the Fed has kept interest rates at the zero bound, it has punished savers. Yet those who reap dividend income have now almost fully recovered. From the BEA’s Income and Outlays, we can get a picture of how one group has recovered while the other not so much:

Now, there are many possible reasons that the chart looks as it does. For example, less money in interest bearing accounts (a distinct possibility that I’ve not yet explored) would obviously result in less interest being paid, all else being equal. But the rise in dividend income favors the investor class, and the lack of interest income is clearly a drag on conservative investors who cannot take the risk of more aggressive investments. To be perfectly clear: I am not suggesting a rate rise or criticizing recent Fed policy; I’m simply demonstrating graphically something we all know to be true.

And a Note from Rich Bernstein

Merrill Lynch’s former US Strategist, Rich Bernstein, hung a shingle on his own advisory shop a while back. I’ve always respected Rich and continue to follow his work. His most recent piece [PDF], on the increasing difficulty of truly diversifying, is very interesting.

For all the talk about hedge funds, it would seem from Rich’s Chart 9 that perhaps the whole 2/20 setup isn’t providing folks with much (if any) diversification or benefit:

Rich goes through correlations asset class by asset class (some are shocking), and the results are a bit scary. I highly recommend the entire piece.


And a clarification: I should have, but didn’t, run the USPRIV chart from employment troughs; I ran it from NBER troughs of economic activty (i.e. the ends of recessions). It doesn’t matter much in the scheme of things, but it does matter somewhat. I apologize for not being clear on that point, and will run another chart in the near future.


Category: Data Analysis, Dividends, Economy, Employment, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Miscellany”

  1. Jim67545 says:

    Regarding the recovery, and more specifically the GDP projections for this year, I have been wondering just how much growth we realistically should expect. We look at China, which is both rapidly emerging from the 19th century and eating everyone’s lunch in manufacturing. We look at where American firms, such as the auto makers, YUM, Starbucks, Walmart, etc. are building stores. On one hand you have this country which is heavily built out for many companies and compare it to 3rd world or emerging economies which are virgin ground to be plowed. Given the headwinds (offshoring, etc.), the degree to which we are already developed out and the surpluses (housing, retail, CRE) which we created prior to the recent crash and which we have to work off, can we realistically expect more than 1.5% or 2.0% growth in GDP – or even that much?

  2. ilsm says:

    The fed is inflating equities and preventing wage inflation, very successful in applying the brakes to wages.

    Austerians gutting wage growth.

    Worst of both worlds for the 99%?

  3. Greg0658 says:

    Jim “look at China, which is both rapidly emerging from the 19th century and eating everyone’s lunch in manufacturing”

    I’m with that thought – do not under estimate the drive of a people & their system that feel under threat

    I think it is the drive of our United States structure TOO .. perform for US or starve …. of course there is that polar oppostite faction TOO .. life is for living not fighting

    ying/yang .. the blessed / need a curse .. what goes up / must come down .. tides go in / tides go out

  4. Conan says:

    Corelation is good to know and be aware of, but in my opinion it mailnly for the “Buy & Hold” Style of investing. If you are a trader and in particular go both Short & Long you automatically have all the corelation you need. Lastly each person has their own style and abilities, but for me, the “Buy & Hold” approach outside of a secular Bull market is not the right approach. When in a Bull market buying a basket of non corealted goods and averraging into them is very successful, however I would find it interesting to see how Mr McBride’s method has worked since the year 2000. If it had not been for going Short in the last decade I would have substantially reduce my returns and in particular the compounded returns over the period.

  5. Conan says:

    I have been an Industrial Engineer for over a quarter of a century and traveled all over the world. Let me tell you that creative distruction from Technology, new systems, i.e. ISO & LEAN Manufacturing and lastly off shoring are a major change in how things are made.If I think back to the way we made things when I got out of the University and what we do today, it is a different world. I come from the Heart Land of the United Stes and started my caeer there, but have since manufactured in many of the “Emerging Market” countries. To be honest in many respects a manufacturing site is plug and play if you have enough capital & organization behind you.

    So let me be blunt and to the point, other than massive protectionism or huge political intrevetion of some kind there is no going back. Even then the changes of what is know will not be easiely put back into the box. Manufacturing will continue one way or another to keep producing more dollar output with fewr dollars of input from labor. This maybe due to technology reducing first world labor costs or the sourcing of labor in the Emerging Market or the real bomb thrown over the fence as I see more an more of is technology used in low wage countries.

    The big element that most do not discuss is threefold: the first is speed to market and being close to your customer. These huge supply chains being drawn out all over the world are very hard to react in many prodcuts to meet the customers needs and supply quick prodct. Some goods are so synsative that they will have to be brought closer to home. 2) When I strted off shore we had a rough rule of 10. Ten dollars in the US, One dollar in Latin America and Ten cents in China. Today labor in China is more epensive than in Latin America and Japan, Taiwan and S. Korea are approachin g or surpassing US costs of labor. 3) The over all cost of transportation. When we had the last oil shock and price zoomed to 100 dollars per barrel there wa a lot of talk about relocating factories as this cuts the gains of many supposed sayings by off shoring. This maybe one of the biggest sleeper issues to bring work home. If internationionally shipping cost sky rocket there will be more incentive to prodcue locally.

  6. Conan says:

    Lastly I attend a lot of meetings on LEAN Manufacturing and lately I’m seeing a differnt group of folks, particualarly from Baking and Health Care. As an Industrial Engineer I have always found these industries in the US particularly frustrating. They are super inefficient and non resposive to the customer.

    There are billions if not trillions of dollars on the line for disruption in both technology and LEAN Systems. I would say the probability of major disruption in the basic way these industries are run is likely. I would place this in the process to where I was when I started in Manufacturing. The only caveaot it it seems to me that changes is happening faster now days or maybe I’m just getting old!.

  7. constantnormal says:

    OK, I get it.

    If one tries to avoid risk via diversification, when every asset class is highly correlated, diversity is ineffective as a means of risk avoidance.

    There are no safe harbors.

    Stop trying to avoid risk and figure out how to survive.

  8. Finster says:

    Correlations imply that the only diversification is your CASH allocation. We currently are in a bi-modal market, where deflation rules (increasing cash’s buying power relative to assets), but fear of the policy response front runs possible inflation (driving oil and inelastic demand goods).

    Policy will seek to prevent deflation, because it kills jobs, kills the economy and even more importantly destroys bank balance sheets.

    If you hold cash you align for deflation, which is what the greatest powers in the country and their political influence want to avoid at all costs. You bet bet on increasing value of the liability of banks (commercial bank money is our means of exchange). I think that way lies a fools bet in the long run.

    My best bet would be equities of corporations with pricing power and inelastic demand for their goods.

    (disclosure: I’m long equities of said companies, because I put my money where my mouth is)

  9. b_thunder says:

    “As the Fed has kept interest rates at the zero bound, it has punished savers. Yet those who reap dividend income have now almost fully recovered. ” – No Sh*t, Invictus!
    Emanuel Saez demonstrated in NY Times a few weeks ago that 93% of all income gains in 2010 went to the top 1%. More than 30% – to the top 0.1 of top 1%. Does anyone seriously think that 70% consumer-based economy can live with such income distribution?

    And the dividend chart itself – it VERY misleading. It goes from 100 to 150 to 100, but my bank’s CDs yield 0.5%, while in 2007 they were yielding 5.5%. I’m talking 90% decline!

  10. b_thunder says:

    Invictus says: “I am not suggesting a rate rise or criticizing recent Fed policy” – well, maybe you should? The Fed’s been playing “god” with every and all asset classes, making winners and losers for the last 4.5 years (starting with Bear Sterns – the loser, Jamie Dimon – the winner.) Interestingly enough, the “winners” have not done anything to deserve that and, perhaps, were the primary cause of this mess in the first place.

  11. WhyDoYouSayThat says:

    I have a question about the first chart:

    If 100 represents the trough, and the chart is supposed to represent each recovery from its trough, why do some paths go below 100? Wouldn’t any value below 100 invalidate the idea that the series has started from its trough? And therefore the series should be recalibrated so that the lowest number is 100 and the first point in the series?

    Invictus: That’s my bad. I threw this post together just a bit too quickly. Let me explain: The “troughs” to which each starting point are indexed (at 100) are the points in time at which the NBER declared a recession over. That employment sometimes dipped beyond that is perfectly natural. I did not use employment troughs, but economic cycle troughs as dated by NBER. I could work up a chart such as the one you describe – actually might be interesting to do so.

  12. James Cameron says:

    If you want to understand the future of America, if you want to grasp why we are not doomed, then you MUST spend some time with entrepreneurs like these.


    This country has always had entrepreneurs – including a boatload of them in the late 1990s – but that hasn’t prevented any of the debacles we’ve had this decade, nor done a thing to address the ones that may be over the horizon. I firmly believe we will muddle our way through, but I’m not clear what our young, wide-eyed entrepreneurial class will have to do with it since some of the most serious challenges we face as a country are connected to fundamental issues of governance. A gut-wrenching crisis or two may well be the medicine required to cure this affliction in the years ahead.

  13. StatArb says:

    What about the public sector jobs chart ? ?


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  15. end game says:

    Bernstein says Treasurys are the only asset negatively correlated to equities, therefore to be well diversified you need Treasurys to counter the risk of everything else. It is logical, it allows you the freedom to be aggressive with the risk side of your portfolio, and it has worked.

  16. RothcoUDipthtick says:

    Personally, I think you need to go a step further than just by lumping all hedge funds together as a composite…

    For example, if you look at equity market neutral funds or macro or CTA and look at the correlation of these vs S&P or MSCI World it is minimal e.g. 0-0.1.

    My approach therefore, has been to equal weight funds with low correlation – mildly reducing the exposure to gov bonds, and taking a little of equities.

    I’m not saying I am right – but it is difficult to invest in treasuries/developed market govt bonds with low/negative real yields – despite the attractiveness of negative correlation. There is interest rate risk here.

    Surely, there has to be some tradeoff. When you work out how much lower yields will have to go over the next several years to continue producing 5%+ returns, and when you can achieve 5%+ from other means without the interest rate risk and the correlation (if you pick the right sub-strategies, but you accept a certain degree of manager risk) – it is worth considering – doesn’t have to be a big play to edge the compound over several years.

    I wouldn’t be surprised to see a very high number/weighting of directional (equity) funds in the hedge fund composite index – by and large these do disappoint.

  17. PDS says:

    Re the first chart?…it’s Bush’s fault

    Re the green line on the first chart? It’s Reagan’s fault

    Re the Div chart?…its also Bush’s fault

    Re the Bernstein chart?…its the banksters and Fed’s fault

  18. AHodge says:

    S corp dividends are likely the main explanation
    even more than c corps ramping back
    last i looked over 40% of net dividends paid BEA style was S corps
    where all their paid out profits are “dividends” and they pay out “all” their profits